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Transparency as a business asset

November 11, 2014 by gfoss   Comments (0)

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Developers and software providers love open source software (OSS) for its capability, maturity, accessibility and transparency. So why isn't there more promotion of the use of open source software and why do procurement professionals find it so difficult to grasp the value of OSS?

One of the key reasons may lie in the genuine lack of clarity that surrounds the accounting of open source software, which has zero license cost.

The ubiquitous use of OSS throughout the technology sector coupled with the lack of accounting policy clarity surrounding the acts of creating and open source software, is undervaluing the assets of software intensive sectors like healthcare and large public institutions like the NHS.

UK and global accounting standards ensure that software creation and use is properly recognised at the appropriate time on as assets on balance sheets to reflect fair value using license payments and development effort as metrics. Customers, investors and management then see it as a visible contribution to the capital asset base (i.e. an investment), which requires risk management and security in financial planning.

However, these rules seem to break down for OSS, where the “license payment' is zero. This means that:

  1. NHS Trusts who use OSS are undervaluing their software (and attached) assets

  2. Software providers who create OSS may not be getting the corporation tax breaks they deserve

If OSS was properly accounted for, then there could be a potential windfall for OSS creators, and a medium term boost to the NHS as the true value of the contribution made by OSS was realised by an enlightened economy.

Are NHS Trusts and other services that use OSS undervalued?

OSS assets have a zero license fee, because authors want the widest possible adoption and want to empower users to create value without being encumbered by author's royalties and other constraints. But the absence of price also means no presence on a Trust's asset register, which is a bit like quietly taking ownership of a car or a building without telling anyone. Without a registered asset value, the effort of making the OSS asset work for their staff and patients, that would ordinarily be classed as capital expenditure (CAPEX), is instead classified as operating expenditure (OPEX). Now this may suit businesses which prefer OPEX, but NHS Trusts are not subject to corporation tax for core activities and might instead prefer to be more precise about the state of their capital assets to assist financial planning. If the numbers are small, there is no issue, but if OSS usage across the Trust is significant covering entire infrastructure stacks, server and desktop applications, then a Trust may be significantly under reporting its true asset value and restricting access to finance. There would also be the potential for Trusts themselves to eventually sell on these assets, if they have created enough reusable value.

Software companies creating OSS should get tax breaks

On the supply side, a software supplier which “open-sources” their own software asset, is providing a gift to the public that would normally benefit from a capital asset write-off and commensurate corporation tax credit, in the same way as writing off or gifting other plant or equipments. The value of their assets is reduced because they have given away software code, which can then be 'forked' by other orgnaisations who are able establish their own control over the software. This is a strong argument for allowing the software provider a complete capital value write-off against corporation tax. Such companies plan to gain in the medium-long term through the provision of attached services or products in accordance with well trodden open source business models.

OK – So how could you attach a value to OSS?

Here is the rub, open source software would have to be valued against an 'in production' cost model for it to be added to the asset register. A simple download for personal or development use would clearly not count. Many proprietary software suppliers use an 'in production' model in their license payment terms to match the customer's derivation of value from their software. The extent to which software is deployed into production is normally specified in the terms and measured by audit-able factors such as number of users, servers or data used by the software. OSS code is not normally published with any similar valuation models. However, if software providers were more aware of the financial benefits to Trusts, and further motivated by the a potential tax break related to this benefit, then providers may consider publishing such models to assist Trusts and procurement professionals in project planning. In the absence of such guidelines, Trust accountants could calculate the 'fair value' of their OSS assets by using the proprietary pricing model data of a product of the same functional class. Other valuation models are also possible like COCOMO, but they lack market testing.

The numbers involved are big

Just looking at the NHS Trust side of things, there appears to be potentially huge Trust benefit of migrating to OSS and recognising existing OSS used within the organisations. For instance,

a) if just half of the NHS Trusts migrated to a simple open source infrastructure component attracting a license fee of £50K, then the NHS as a whole would:

  • spend nothing on license fees

  • create £5m of Capital Asset value, excluding project costs

b) for a relatively 'cheap' £1.5m OSS electronic patient record system license:

  • over £150m would be added to balance sheets, excluding project costs

Given the size of potential OSS uptake in use across the NHS and UK public services, a UK OSS accounting policy may even give a significant boost to UK GDP, fueled by an increased motivation to use OSS.

All this makes the £20m of open source funding announced by NHS England sound not only prescient, but also a real bargain!

How would an OSS asset value accounting policy affect the general perception of OSS?

If assets have no visible impact on the balance sheet, there is nothing to be discussed in the annual report, no 'value at risk' to be proactively managed and no impact on financial planning. OSS promotion is currently left to the 'techies', who are usually too embroiled in software delivery and risk. With an OSS presence on the balance sheets, OSS tax breaks in place this transparency witwould result in more promotion of OSS by software providers and Trusts, together with a global view of how much OSS is being deployed across UK businesses to feed statistics to guide Health (or any other) sector tech strategy and procurement strategy that involves OSS.

More work required!

In a market which is still suspicious of OSS, we need first need to take baby steps forward toward an OSS valuation policy, but there certainly seems to be enough potential benefit here to warrant more work in this area. Guildfoss has opened the discussion by presenting the case at EHI Live healthcare IT event on 4,5 November, and is following up with a small group drawn from industry, Trust representatives and NHS England, to see if it there a clarification of OSS accounting policy is needed.